Dollar store merger means more competition

Hadley Malcolm / USA Today – Competition among discount stores is about to ramp up with Dollar Tree’s acquisition, and revitalization, of Family Dollar’s more than 8,200 stores, analysts and industry experts say.

Family Dollar, which was founded in 1959 by CEO Howard Levine’s father Leon, has been suffering from a lack of direction and tired stores that haven’t changed in years, they say. It’s also wavered from the enticing price point its moniker alludes to. And an expansion plan was bagged earlier this year when the company said in April that it would actually close 370 stores and said foot traffic was declining.

Now Family Dollar stands to benefit from Dollar Tree’s management expertise while maintaining and bolstering its brand, and other discounters like Dollar General and even Walmart could see sales falter.

“If Dollar Tree can bring their magic over to Family Dollar, it’s going to have a pretty significant impact on this overall sector,” says Kurt Jetta, CEO of TABS Group, a consumer analytics firm.

The new company will have more than 13,000 stores in 48 states with more than $18 billion in annual sales. Jeff Green, president and CEO of retail consultancy Jeff Green Partners, also says Dollar Tree has a newer, more exciting concept, plus it sells products for truly $1 or less, which has resonated with deal-obsessive customers.

Family Dollar has some work to do to attract shoppers again, including a clearer pricing strategy and better merchandise assortment, both he and Jetta say.

“Family Dollar had really kind of lost themselves,” Jetta says, adding that Family Dollar’s price points have been climbing; stores were carrying items like Gillette Fusion razor packs for upwards of $15.

Unlike other mergers where the goal is to scale back one of the brands or absorb it completely to reduce competition, Green says Dollar Tree and Family Dollar’s arrangement is “about maximizing the sales of each store” because their customer bases don’t overlap very much. “They’re very complimentary chains,” he says.

Dollar Tree’s more than 5,000 stores are primarily in suburban markets while Family Dollar is concentrated in urban and rural markets and is positioned more like a discount department store than a true dollar store.

Dollar General was rumored to be a potential buyer of Family Dollar ahead of the merger. A spokesman declined to comment. The two chains are much more similar when it comes to merchandise and locations than Dollar Tree and Family Dollar, Green says. An acquisition would have given Dollar General the chance to absorb the threat of Family Dollar rather than compete even more intensely.

“Dollar General should be worried. (The merger) now requires Dollar General to really step up its game,” Green says.

Sterne Agee analyst Chuck Grom said in a note about the acquisition that Dollar General has been benefiting from Family Dollar’s missteps in recent years. Now the number-one brand in the dollar store industry will have to be a “sharper competitor.” Dollar General controls 35% of the dollar store market, according to an April report from market research firm IBISWorld. Family Dollar and Dollar Tree each controlled about 21% and 15% respectively.

And while Wal-mart still wins when it comes to sales and square footage, the merger could also affect the world’s biggest discounter, which has seen declining sales and customer traffic in recent months. Wal-mart has been expanding with smaller-format stores that could be more direct competitors with the dollar store category.

“The strengthening of Family Dollar will chip at Walmart,” says Green, but he adds, “Wal-mart’s just so big, there’s a lot to chip against.”

The competition means dollar store shoppers will likely encounter better customer service and nicer stores as the brands hope to stand out from each other and work to retain the base of budget-conscious shoppers they attracted during the recession.

The brands are “going to try to completely eliminate the stigma with shopping at dollar stores,” says Zeeshan Haider, an analyst with IBISWorld.

Haider also suspects Wal-mart could consider acquiring one of the dollar chains as it tries to make inroads on that part of the discount market. Wal-mart has opened several hundred Neighborhood and Express markets in the past two years.

“Wal-mart is opening up these (smaller) stores rapidly within the same sort of neighborhoods as these other (dollar) stores,” he says. “So it’s going to trigger more competition and eventually trigger consolidation.”

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Jeff Green Partners was founded in May of 2004 in response to a growing demand for a new level of expert consulting services in the retail real estate marketplace. Led by President and CEO Jeff Green, Jeff Green Partners provides a full spectrum of analytical and interpretive services for property owners and developers.